Friday, October 14, 2016

The Best Broker for Dividend Investors: Interactive Brokers

For the first three to four years of my transformation into dividend growth investing, I managed to develop a process of identifying attractive companies with prospects for further increases in passive dividend income. I managed to pay very little in commissions, since I was using brokers such as Zecco, which offered approximately 10 free trades every month. Since then, I kept adding money to other brokers, but was not able to find another company which offered low costs for me. This resulted in limitation on number of companies I can invest in every single month, despite the fact that I usually had more than 15-20 ideas at all times. I felt limited in the number of companies I can purchase every month, given that most brokers:

1) charge somewhere between $5 and $10 per online trade these days,
2) the fact that I do not want to pay more than 0.50% in commission costs per each transaction, and
3) the fact that I have a limit on the amount of funds I can contribute each month,

I believe that looking for great investments is important, but so is keeping costs to the minimum. Dividend investing is a business, and as the business owner my job is to keep expenses to the bone.

Back in 2014, I finally managed to find the broker that is right for me, and charges me as little as $0.35 per stock transaction. The broker is Interactive Brokers. It is SIPC insured up to $500,000, and as an added bonus is publicly traded, which makes it easy to monitor its financials and ensure I have entrusted my money with a reputable organization. In addition, investor accounts are further insured up to $30 million dollars with certain underwrites at Lloyds of London.

This broker is geared more towards experienced investors, and not new investors. Some investors might find the platform to be counter-intuitive, and difficult to navigate. If you need hand-holding, Interactive Brokers is not for you. If you would rather pay a $5 - $10 commission per investment, rather the low cost of Interactive Brokers, then you are going to cost your future self tens of thousands of dollars in potential excess expenses. Even small sums accumulate to large amounts given enough time and compounding.

My review will focus only on investing in US stocks using Interactive Brokers (IB). However, they also offer direct investing in European, Asian, American and Australian markets at pretty low and competitive commissions. In addition, you can invest in futures, commodities, currencies, bonds, and options using their platform. I believe that most dividend investors mostly invest in stocks, while a small minority invest in options or bonds. Interactive Brokers also offers IRA accounts. I am also not going to discuss that Interactive Brokers has the lowest margin rates available for retail investors. For someone with at least $100,000 in assets, the margin interest charged is 1.41% per year. The other brokers easily charge an interest rate of 6% - 8%/year for using margin.

Account Opening

To open an account, you need $10,000. For some, this could be an obstacle. However, if you are under the age of 25, you can open an account with as little as $3,000. You can fund the account with cash or securities from your other broker. I moved some of my securities from an existing account at Tradeking to Interactive Brokers. Vanguard and Fidelity do not charge a partial ACAT fee when you transfer some of your securities to another broker.

Opening an account includes the usual requirements such as Social Security Number, Address, Bank Account Information etc. The nice thing is that Interactive Brokers is also open for Non-US citizens. So if you are reading this site from Canada or UK or Germany for example, Interactive Brokers could be a good option that could dramatically lower your investment costs.

After you open the account, IB sends you a security card. It includes some security combinations, which need to be entered when you login to your account. Interactive Brokers takes security very seriously, and the random combinations on this security card are a prime example of it. When you withdraw or add cash to your brokerage account, they require further authentication and additional authentication using the security codes.

Interfaces

Interactive Brokers allows investors to access the trading platform using several interfaces. You can test drive the different platforms under this link.

You can use the TWS platform, which is really powerful and requires a software download. If you make investments from your home computer, you might be able to utilize the full scope of the software platform.

There is also a way to access the brokerage from the web. This platform is called Webtrader. I utilize this most often, because I spend the time when the stock market is open at the office.

A third way to access the platform is using a mobile application. I have utilized this a few times, and was satisfied with the platform. This is a nice way to make an investment, or monitor portfolio holdings, if one is on the go.

The nice thing about Interactive Brokers is that my orders are routed directly to Electronic Exchanges in real-time and receive the best price available at the moment. I think that getting the best prices is very important, because a broker that does not provide that, might be costing you a lot of money.  I used to purchase shares using Sharebuilder's weekly investments or Loyal 3, and from my experience I can tell you that the prices at which my orders have been executed did not seem very good. While a few cents/share might not seem like much, it all adds up over time.

Commissions

There are two types of commission structures for Interactive Brokers. The first is fixed, where you pay half a cent per share, with a minimum amount of $1/trade. This means that if you purchase anywhere from 1 share to 200 shares, you will pay $1. This is not an issue for most investors, since few of those I have talked to spend more than $1,000 –$ 2,000 per individual investment. If you are a high roller, you can buy 300 shares of Johnson & Johnson (JNJ) for $30,000 and pay $1.50 for this transaction. Fixed pricing for stocks, ETFs and warrants charges a fixed amount per share or a set percent of trade value, and includes all IB commissions, exchange and most regulatory fees with the exception of the transaction fees, which are passed through on all stock sales.

The second commission type is tiered. Tiered pricing for stocks, ETFs and warrants includes low broker commission, which decreases depending on volume, plus exchange, regulatory, and clearing fees. In cases where an exchange provides a rebate, Interactive Brokers passed some or all of the savings directly back to you. For those do it yourself dividend investors like myself and others, the minimum commission is $0.35/trade. Other than that, the cost is 0.35 cents/share. This means if you invest in 100 shares, you will pay a 35 cent commission. If you buy 200 shares, you will pay a mind-boggling 70 cent commission.

While there are exchange fees, these are negligible in my experience trading with Interactive Brokers. My investment amounts are approximately $1000/per investment, and most companies I invest in sell for more than $10/share. As a result, I pay 35 cents/investment. Initially, I went for the fixed commission at $1/trade, because I was afraid of the exchange fees I would have to pay. I decided to change it, because I like saving money. After reviewing my investments with tiered commissions, I have not paid much in other fees. If you are a heavier hitter than me however, your situation might be different.

On a side note, the $1/trade commission was what I originally used. Then a reader informed me that the tiered commission system would be even cheaper. Once I switched to it, I ended up paying something like 0.35 cents per share for stock trades, for a minimum of 35 cents/trade. Since I usually buy less than 100 shares at once, I end up paying something like 35 cents/trade, which is very cheap. Option trades are something like $0.70 per contract, with a minimum charge of $1/trade. The nice thing about Interactive Brokers is that they do not charge you fees when your options are exercised. When I have sold puts at places like Schwab or Tradeking, they charged me a commission to enter into the transaction, and then a commission when my options were exercised.

Other costs

There is a $10 monthly fee for investors, whose account value is less than $100,000. This fee is waived for the first three months after opening the account. If your account balance is less than $100,000, the monthly fee is reduced by the amount of commissions you generate.

While $10/month seems like a lot, it is not that much when compared to what other brokers charge for one or two monthly investments. The $10 monthly charge amount is reduced by amount of commissions you pay. For example, if you pay $2 in commissions for the month, you only have to pay $8 more to get the $10 minimum. Since I am a buy and hold investor, I use delayed quotes, which are free. However, if I wanted to get streaming real time quotes, I would have to pay $10/month for it. If you are a dividend investor who makes a few investments per month, chances are that you do not need streaming real time quotes.

In comparison, broker Tradeking charges $4.95/month – if you make two trades/month every single month, you are paying $10 whether you like it or not. With Scottrade, Merrill Edge or Fidelity, you pay $7/trade, while with Schwab you pay $8.95/trade. Fidelity charges $7.95/trade. You can see that an investor who has less than a $100,000 balance will do better at Interactive Brokers if they make at least two transactions per month there.


If you make 30 transactions/year, with Tradeking your cost will be $150. With Scottrade - $210/year. With Schwab – $268.50/year, while TD Ameritrade will cost $299.70. With Interactive Brokers, your total commission cost will be somewhere between $10.50 to $30/year. This assumes you do not buy more than 100 shares at a time, and you make approximately 30 investments. The range accounts for the difference between tiered commission and the fixed commission.

One of the biggest worries from some investors is the $10 monthly fee. As someone who likes to find solutions about things, I have provided ways to look at this proactively. Let me walk you through a few examples to show you why that worry is not warranted for most situations.

1) The first option to fund the account covers those who already have a brokerage account at an institution such as Fidelity, Vanguard, Tradeking that lets you transfer some of your existing shares over to another broker fee-free. An investor who has $100,000 in shares sitting in those other accounts can transfer them over to Interactive Brokers, and not have to pay any account transfer fee or the $10/monthly fee. And they will get to enjoy ridiculously low commissions forever. This includes my experience, as I had been building up my dividend portfolio for the preceding 6 - 7 years. I moved a large portion of my shares held at Tradeking over to Interactive Brokers in 2014.

2) Even if your shares are housed at another broker that charges you for outgoing transfers of stocks, you can still benefit. Let’s assume your broker charges you $5/trade and a $50 fee to move your stocks elsewhere. If I had $100,000 in securities from another brokerage, a $50 ACAT fee, and I make 30 transactions per year, it would make perfect sense to move to Interactive Brokers. This is because I would pay $65.50 in total ( $50 ACAT plus $0.35/trade for 30 trades). In the second year, I would only pay $10.50 for 30 more trades. If I stick to a higher priced broker, I would pay $150 in year one and $150 in year two. That is a lot of money to waste on brokers, for a basic commodity service. Switching brokers is a one time cost, and future trading doesn't require any additional effort. Even a small amount saved regularly can compound into huge nest eggs over time.

3) If I only had $10,000 to open an account, I would only open it if I make more than 1 investment/month. For example, If I invest $2,000/month with another broker, I will be paying $10 - $20/month in commissions alone, if I made at least 2 trades/month. Therefore, it would make sense to open an account with Interactive Brokers, because within a few years, my brokerage cost will be very low, and my costs today will be similar to what other high cost brokers offer. This of course assumes that the investor keeps putting $2,000/month, reinvests dividends, and that capital also provided some compounding as well. Therefore, it could take approximately 3 - 4 years to get to low commissions. After that however, that investor will pay something like 70 cents/month in commissions forever. Since the average time to accumulate a nest egg is definitely longer than a decade, Interactive Brokers seems like the perfect vehicle for those investors.

4) If I didn’t have $10,000 and I were over the age of 25, I will not be able to open an account with Interactive Brokers. I will need to save that amount, before opening an account with IB. I would start an account with Loyal3, or Tradeking or another broker, and as I gain a sufficient amount of assets, I would transfer them out fully or partially to Interactive Brokers. Based on my interactions with readers, those that have never had a brokerage account find IB interface to be a little confusing. So based on that, I would not open an account with IB, if that is the first brokerage account I ever had. I personally do not find that interface to be incredibly complex. However, I have used different types of brokers of the years to know how to familiarize myself with different layouts.

5) I would not open a new IRA account with Interactive Brokers if I do not plan on doing any future investing activity. While Interactive Brokers offers IRA accounts – Roth, SEP, Regular, it also has a $7.50/quarterly fee payable to the trustee. For a new IRA account, it could easily take a decade or more, before the account reaches $100,000. During that time, it would incur the $10/monthly fee and the $7.50 quarterly IRA fee. Of course, if your IRA is in the 6 figures, and you make more than 4 trades/year, it might be worth switching over to Interactive Brokers. Honestly, a $30 annual fee on an IRA worth $100,000 which is invested in a diversified portfolio of quality dividend stocks is a much lower annual cost than even the lowest cost index fund out there. Of course it all depends on what you are trying to accomplish. If you plan on making more than 4 investments per year, a retirement account through Interactive Brokers will have a lower cost than a no fee account at an institution that charges you $9/trade.

Interactive Brokers also allows opening of Canadian retirement plans such as the TFSA and RRSP. There is a quarterly fee of CDN $12.50 for retirement accounts, on top of any other maintenance fees. Unfortunately, commissions on Canadian Stocks are much higher than US ones. The tiered commission is 0.8 CDN cents/share, for a minimum of CDN $1/trade. The fixed commission is 0.1 CDN cent/share, for a minimum of CDN $1/trade.

My experience with Interactive Brokers

To some this will sound like too much hoops to jump through. Once you familiarize yourself with the pricing, it seems pretty straightforward however. This looks complicated only on the surface – in reality this is the cheapest alternative out there for experienced dividend investors. Interactive Brokers provides direct access to the stock market, and super low commissions, for a service I would be using anyways ( though the same service would be much more expensive at another broker). Therefore, one of the errors I had made for a few years after Zecco stopped offering free trades is pay $4 - $9 more per trade than I have to. I like cutting costs, without incurring any additional effort on my part after the switch. With Interactive, I have cut costs to trade without any additional effort and without really changing the way I invest.

This is the type of analysis that has helped me save money on everything in my life – from taxes, housing, transportation to brokerage costs. To some, a few dollars saved here and there is not worth their effort. However, small amounts accumulate easily – even a small leak can sink a ship. If you save $150/year, and invest those savings at 10%/year, you will have over $66,000 to your name in 40 years. In other words, to earn $150 in dividend income, you need something like $5,000 to invest. This is why I closely track each dollar that is spent – I want to make sure I do not spend a dollar more than I have to.

I transferred enough securities from my Tradeking account to not have to worry about paying the $10/monthly fee. Transferring shares to Interactive Brokers is as easy as entering share symbols and share numbers and broker account number. It took a few business days to transfer the shares from my Tradeking account to my Interactive Brokers accounts.

I like the fact that everything about Interactive Brokers is very transparent. They offer a lot of bells and whistles, which cost a little more. As a passive dividend investor for example, I do not really need streaming quotes. I do like the fact that I only pay about 1.41% on margin, which is much lower than any other brokers.

Since I started using this broker, I have saved a lot of money – hundreds of dollars, since I make several purchases every month. I expect that over the next 10 – 20 years, I would save tens of thousands of dollars in commissions. I love the interface, the low commissions, the ability to have my orders directly routed to the stock exchange and receiving the best price. As a result, I have been doing all my dividend investing in my taxable Interactive Brokers account since 2014. I should have signed up for an account much earlier.

If you are interested in opening an account with Interactive Brokers, you can try it by using this link. Alternatively, I can send you a referral e-mail if you would like to support the site directly. Just send me a message at dividendgrowthinvestor@gmail.com.

Full Disclosure: I will earn a commission for each customer that signs up for Interactive Broker. However, you will save tens of thousands of dollars in commissions over your investing timelilife.

Relevant Articles:

Tradeking – Best Broker For New Dividend Investors
How to buy dividend stocks with as little as $10
Best Brokerage Accounts for Dividend Investors
Robinhood Brokerage Review
Stress Testing Your Dividend Portfolio

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